S&P ups Silicon Graphics outlook

Standard & Poor's revised its outlook on Silicon Graphics Inc. to positive from negative reflecting recent progress in stabilizing operations. Also, S&P affirmed its CCC- corporate credit rating, CCC- senior unsecured debt and CC subordinated debt.

The ratings reflect a declining revenue base, limited financial flexibility and a challenging industry environment, S&P said.

Although SGI has a strong technology position in high-end computing and graphics solutions, S&P noted the company has been struggling to restore revenue growth and profitability in the highly competitive technical workstation and server markets.

In addition, economic weakness and reduced levels of information technology spending will continue to pressure the company's efforts to stabilize revenues.

Despite a difficult market environment, SGI has demonstrated significant operational progress, however, S&P said.

The company reported EBITDA of $48.6 million for the nine months ended March 29 compared with an EBITDA loss of $143 million in the prior-year period. In addition, the company generated positive cash flow from operations in the March 2002 quarter, and halted the erosion in its cash balances.

Near-term liquidity is adequate. Unrestricted cash balances were $167 million as of March 29, up from $116 million in December 2001.

The company has limited availability under its $75 million credit facility expiring in April 2003, S&P noted, expressing concern about the company's ability to access capital to refinance significant debt maturity in September 2004.

Sustainable improvements in operating income and cash flow could lead to ratings improvement in the near to intermediate term, S&P said.

Fitch sees Williams balance sheet plan as positive

Fitch Ratings said it views The Williams Cos. Inc.'s announced plans to strengthen its balance sheet by additional asset sales and stock issuance as a positive development. Fitch rates Williams' senior unsecured notes and debentures BBB and commercial paper F2.

The outlook will remain negative, Fitch said, pending the successful renegotiation of Williams' 364-day revolving credit facility maturing in July 2002 and achievement of year-end 2002 debt leverage targets.

Fitch believes Williams' latest move underscores its commitment to credit quality improvement.

Specifics of the plan include the issuance of $1 billion to $1.5 billion of stock in the near-term, up to $3 billion of asset sales, further operating expense reductions and a pledge to maintain base-level capital spending levels in line with operating cash flow.

If successfully implemented, Fitch said these initiatives could lead to a material improvement in key quantitative credit protection measures and debt leverage by 2003.

Fitch noted, however, that Williams' strategy does entail an above-average degree of execution risk particularly given the volatile capital market environment currently plaguing the energy sector as well as a potentially distressed asset sale market.

Williams' ratings are supported by the predictable cash flow contribution from its regulated interstate natural gas pipeline segment (approximately 40% of adjusted 2001 EBITDA) and the core competencies of its integrated energy services segment which owns and operates a portfolio of traditional asset-based energy businesses.

Energy marketing and trading activities continue to expand at a rapid pace both in terms of profit contribution and transaction volume.

However, given Williams' emphasis on long-term structured transactions, continued success in this area hinges upon Williams' ongoing ability to lay-off risk in less liquid long dated power markets as well as manage ongoing counterparty credit and commodity market risks.

In addition, the outlook reflects some uncertainty over the ultimate impact on Williams of the recent bankruptcy filing of Williams Communications Group, Williams' former telecom subsidiary.

While significant progress has been made toward resolving WCG financial exposure issues, Williams is a party to numerous shareholder class action suits related to the WCG spin-off.

Fitch said it is unable, at this time, to accurately quantify any potential economic impact that may result from these or any other lawsuits which may potentially emanate from the WCG bankruptcy. In addition, the time horizon is uncertain.

S&P cuts Williams to BBB

Standard & Poor's lowered its corporate credit rating on The Williams Cos. Inc. to BBB from BBB+ as well as the company's other ratings, including the convertible preferreds to BB+, and its subsidiaries. The outlook is negative.

Although Williams plans to reduce debt significantly over the next year through a combination of asset sales and equity issuances, S&P noted the plan is subject to substantial execution risk.

The net effect of meeting liquidity requirements and the assumption of the $1.4 billion of debt from Williams Communications Group Inc. caused deterioration in the coverage ratios, S&P added.

Prior to the plan to reduce debt, the adjusted after-tax cash flow interest coverage is low for a BBB rating, S&P said, with a minimum ratio of 3 times in 2002 and average ratio of 3.1 times for 2002 to 2004. The coverage assumes the consolidation of debt at Williams' subsidiaries and imputed interest for the debt-like quality of the tolling agreements and capital adequacy obligations associated with trading operations.

The risks are somewhat offset by the fact that management has stated its commitment to stabilizing the existing ratings, S&P said, adding that Williams has proven to be very proactive in enhancing the company's liquidity position during a time of duress, following the market turmoil caused by the Enron Corp. bankruptcy.

This proactive response is expected to continue as management reduces leverage over the next year.

Although the current financial ratios are low for the rating, S&P said the negative outlook reflects the execution risk in reducing leverage to attain adjusted funds from operations to interest coverage ratios commensurate with a BBB rating while maintaining the current quality of assets.

If the company is able to achieve its goal, S&P said the ratings could be affirmed at stable. However, if substantial progress toward the goal has not been made by year-end 2002, the ratings could fall by one notch.

Moody's ups Foot Locker convertible to B1

Moody's Investor Service upgraded the debt ratings of Foot Locker Inc., including the convertible notes due 2008 to B1 from B2, and changed the outlook to positive from stable.

The ratings were upgraded as a result of significantly improved financial profile due to accumulation of cash and a reduction of leverage, improvements in continuing operations, a management team that is focused on cash generation and managing growth through internally generated cash flow, successful execution of its European strategy and growth in the U.S. market.

Moody's said the ratings also reflect risks involved with the increasingly fashion sensitive athletic apparel and footwear market, risk of potential changes to financial and growth strategies in the near to medium term, relatively high lease adjusted leverage and modest fixed charge coverage for the rating category.

The rating outlook is positive, as Moody's believes that Foot Locker will continue to see improvements in operations by leveraging fixed expenses and using leading market share to negotiate favorable pricing with vendors, and that Foot Locker will continue to effectively manage cash in order to fund growth internally while improving its leverage and liquidity position.

The ratings could be raised if Foot Locker is able to continue to reduce effective leverage through better fixed cost coverage or lower overall debt, Moody's said.

The ratings could remain stable or decline if the company does not maintain its positive operating momentum or if the return to a growth strategy causes significant cash drain on the company causing leverage to increase.

Moody's cuts MetLife on Mexico acquisition

Moody's downgraded the credit ratings of MetLife Inc., including senior debt to A2 from A1 and the convertible preferreds to Baa1 from A3, but confirmed the Aa2 insurance financial strength rating of Metropolitan Life Insurance Co. following MetLife's announced acquisition of Aseguradora Hidalgo S.A., the largest life insurer in Mexico for about $965 million. The outlook is stable.

Moody's said MetLife faces a number of challenges with the acquisition of Hidalgo including the eventual loss of some preferred marketing arrangements that the Mexican company currently enjoys because of its government ownership.

MetLife will face execution risks in introducing new products and efficiencies to the company, Moody's said, and the rating agency said it views negatively the sizable amount of goodwill and intangibles that would be added to MetLife's balance sheet.

Moody's said that the downgrade of MetLife's securities was driven primarily by the rating agency's opinion that the rating differential between the insurance financial strength ratings of operating insurance companies and the debt ratings of holding companies should be widened to better reflect the considerable differences in expected losses of obligations of the two different types of entities.

The rating agency noted that MetLife's ratings previously carried a negative outlook, which reflected this viewpoint.

S&P cuts Toys R Us to BBB, puts mandatory convertible at BBB

Standard & Poor's lowered the long-term corporate credit rating on Toys "R" Us Inc. to BBB from BBB+, along with other ratings, and assigned a BBB rating to the new $402.5 million mandatory convertible due 2007.

The downgrade was based on a lack of improvement in credit protection measures in 2001 and S&P's expectation that these measures will not improve significantly during 2002 due to the company's continuing store remodeling programs, a weak retail environment and intense competition in the toy retailing industry.

S&P said the ratings reflect the company's important position in the toy industry, a geographically diverse store base, solid financial profile and management's recognition that it must reformat its toy store concept to remain competitive.

The company had $1.8 billion of funded debt outstanding as of Feb. 2.

The company's difficulties are demonstrated in an inconsistent record of performance beginning in 1995, S&P noted.

In 2001, the operating margin was only up slightly from depressed 2000 levels - 8.8% versus 8.7%. Operating profits were negatively impacted by the store remodeling program, stiff competition and the weak U.S. economy.

From 1990 to 1995, Toys generated margins between 13% and 14%.

Return on permanent capital declined to 8.1% in 2001 from 10.0% in 2000 and compares negatively with the high-teens levels it generated from 1990 to 1995.

Still, Toys is benefiting from management's strategies to position the company as a true specialty driven, value-added retailer, S&P said.

Early results from the company's new "Mission Possible" stores are encouraging, and its U.S. toy operation's same-store sales increased 2% in the 2001 holiday season. In addition, margins began to stabilize in the fourth quarter of 2001 and are expected to show improvement in the first quarter of 2002.

However, it may take until 2003 to assess the success of management's initiatives, as 2002 will continue to be impacted by costs associated with the store remodeling program and the weak economy, S&P said.

Lower profitability has been accompanied by a moderate increase in financial risk during the past few years, as lease-adjusted debt to capitalization trended up to the 50% area.

The recent issuance of $264 million of equity and $402.5 million of convertibles modestly delevers the company's balance sheet, S&P said. Pro forma for these offerings, total debt to total capital is 46%.

Funds from operations to total debt receded to 16.4% in 2001, well below the 20% to 25% recorded in most of the 1990s. EBITDA coverage of interest improved slightly in 2001 to 3.6 times from 3.2 times in 2000 but is below the mid-4.0 times to 5.0 times level generated from 1990 to 1995.

Still, S&P added that maturities are modest and the company's $1 billion multicurrency revolving credit facility and commercial paper program provide solid liquidity.

Although Toys is being impacted by its costly remodeling program and a poor retail environment, S&P said it believes management's strategies position the company for favorable long-term performance.

The outlook incorporates a belief that operating performance and credit measures will gradually improve and that no share repurchase activity will occur until the company stabilizes operations.

S&P cuts Anixter outlook to negative

Standard & Poor's revised its outlook on Anixter International Inc. to negative from stable, reflecting the proposed acquisition of the operations and assets of Pentacon Inc. S&P affirmed its BBB- corporate credit and BB+ senior unsecured ratings on Anixter International as well as the BBB- senior unsecured rating of Anixter Inc.

Chicago-based Anixter is well positioned within relatively narrow market segments and leverages its scale and global capabilities, S&P said, but revenues are not expected to significantly improve in the near term because of economic weakness and lower levels of technology spending.

The proposed acquisition of Pentacor would broaden Anixter's product and industry base, as well as diminish concentration in the more volatile telecom sector.

As revenues declined over the past year, Anixter effectively managed its cost structure and working capital levels, resulting in significant free operating cash flow and debt reductions, S&P said.

Total debt to EBITDA, which includes borrowing under a $225 million accounts receivable securitization program, was 3 times in the quarter ended March 2002.

The proposed acquisition is expected to be financed with a combination of cash and borrowings under Anixter's revolving credit facility.

The current ratings incorporate the expectation that the acquisition will not result in a material deterioration in debt protection measures, S&P said. Adequate financial flexibility is provided by availability under Anixter's $390 million bank credit facility.

A sustained deterioration in debt protection measures following the Pentacor acquisition could lead to lower ratings, S&P added.

S&P takes Bluegreen off watch

Standard & Poor's removed Bluegreen Corp. from CreditWatch with negative implications and confirmed its ratings including its $46 million 8.25% convertible subordinated debentures due 2012 at CCC+ and its $110 million 10.5% senior secured notes due 2008 at B. The outlook is stable.

At the end of the third quarter in December 2001, Bluegreen had $38 million in cash on its balance sheet of which $14 million represented unrestricted cash, S&P said. The company had high leverage levels, with debt to past 12-month EBITDA in the mid-7.0 times area and interest coverage just under 2.0x.

In April 2002, Bluegreen announced an agreement with ING Capital LLC to expand the size of a receivable purchase facility to $125 million and extend the maturity date to 2003. The company has adequate availability through the combination of its current credit facilities, warehouse facilities, construction and development facilities and its receivable purchase facilities. The rating also reflects expectations that the company will be able to obtain additional facilities as needed, S&P said.

Bluegreen has a high debt level, relies on capital market appetite for receivable sales, is exposed to timeshare and residential real estate development risk and faces a high level of competition in the timeshare industry, S&P said.

Partially offsetting the negatives are the company's focus on drive-to vacation destinations and its experienced management team, S&P said.

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